Absorption (Full) vs Variable (Direct) Costing

Question 1

Assumptions of Cost-volume-profit (CVP) analysis

Answer 1

Cost are either fixed or variable

all cost behave in a linear (straight line) fashion

Over the relevant range - cost behaviors will remain constant

Question 2

Absorption costing

Answer 2

is US GAAP

Includes Direct Materials, Direct Labor, and all overhead (Fixed and Variable)

Question 3

Absorption Formula

Answer 3

Revenue

Less: Cost of Goods Sold

Gross Profit

Less: Operating Expenses

Net Income

Question 4

Variable Costing approach

Answer 4

not GAAP

Only includes Direct Materials, Direct Labor and Variable factory overhead

• Fixed Factory Overhead is excluded from inventory and treated as period costs

Question 5

Variable Formula

Answer 5

Sales

Less: Variable Costs

Contribution Margin

Less: Fixed Costs

Net Income